Business context and reporting period
3PEA International, Inc. (the filing’s registrant; PaySign is its brand) filed this unaudited Form 10-Q for the quarter ended September 30, 2014. The company provides prepaid-card programs and processing services, including healthcare, pharmaceutical, corporate incentive and rewards programs.
Financial results and liquidity
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Revenue | $1.707 million | $1.061 million | $5.348 million | $4.377 million |
| Gross profit | $627,322 | $323,151 | $1.636 million | $1.248 million |
| Gross margin | 36.7% | 30.4% | 30.6% | 28.5% |
| Operating income (loss) | $47,252 | $(77,669) | $(103,427) | $257,834 |
| Net income (loss) attributable to 3PEA | $31,077 | $(92,547) | $(151,420) | $213,696 |
| Operating cash flow | Not presented quarterly | $7,134 | $(1.218) million |
Q3 revenue increased 61% year over year; nine-month revenue rose 22%. Management attributed growth to new corporate incentive programs. Q3 profitability improved, but increased operating expenses drove a nine-month operating loss and net loss. SG&A was $1.633 million for the first nine months, up from $959,000 in 2013.
At September 30, cash was $705,775 and restricted cash was $6.385 million, matched by an equal customer-card-funding liability. Total current liabilities were $8.303 million; current notes payable totaled $779,181, including $567,990 due to related parties. Total assets were $8.273 million, and total stockholders’ equity was a deficit of $29,888. Cash declined $321,464 during the nine months. Investing activities used $386,999, primarily for platform-related fixed and intangible assets.
Changes, outlook, risks and unusual items
- The company said its prepaid-card solution was operating at 75 plasma donation centers, versus 25 a year earlier, and completed rollout at all 23 Interstate Companies locations during Q3. It also launched PaySign-branded programs and said it had added a bank partner to its processing platform.
- Management expected revenue to trend upward and margins to improve as new incentive programs scaled. It said available cash and anticipated remainder-of-2014 revenue would sustain operations for 12 months; this is management’s assessment, not quantified guidance.
- Management said expansion into new markets would require investment in technology, sales and marketing, and regulatory compliance. It was considering raising capital and cautioned that without new capital expansion would be slower.
- A $501,000 shareholder note bears 8.5% interest and is due on demand. Under a March 2014 amendment, monthly payments were agreed through November 1, 2014; if the company did not raise at least $2 million by then, the agreement provided for a further $250,000 payment and conversion of $250,000 into shares, subject to an ownership cap, with the balance refinanced. The filing does not clarify the outcome of this November 1 condition.
- In October 2014, the company issued 75,000 previously awarded employee shares. Other consultant and advisor stock awards were granted during the quarter, with some unissued and subject to vesting. The company reported no legal proceedings or material off-balance-sheet arrangements, and management concluded disclosure controls were effective.
Important facts for investors to verify
- Whether the November 1, 2014 financing threshold was met and how the shareholder-note amendment was implemented.
- Whether the stated 12-month liquidity expectation remains supportable given unrestricted cash, current operating performance and demand-related debt.
- Whether new incentive programs produce sustained revenue growth and improved margins sufficient to offset higher SG&A and platform investment.
- The potential dilution and expense associated with outstanding stock awards and any debt conversion or future capital raise.